Brazilian central bank set for further interest rate cut

BRASILIA - Agence France-Presse

Brazilian Central Bank building in Brasilia is seen in this file photo. AFP photo

Brazil’s central bank is set to cut its base interest rate for an eighth time in a row yesterday as Latin America’s economic powerhouse looks to boost anemic growth without fueling inflation.

The bank’s monetary policy committee, which began its meeting on June 10, was expected to announce a reduction of half a percentage point, which would bring the rate down to a historic low of eight percent.

 With Brazil reeling from the impact of the eurozone debt crisis and signs of an economic slowdown in China, analysts and market operators consulted in a weekly bank survey said they expected another half point cut in August.

“Economic activity remains very low, and therefore the central bank must continue cutting interest rates” by half a point this month and again in August, said Alex Agostini, chief economist at Austin Rating.

 That rate reduction policy began last August, when the central bank shifted course following a series of rate hikes to tame inflation and brought down the base rate to 12 percent from 12.5 percent.
 The debate among bank planners is how to set the limit for that policy so as not to feed inflation.
 A month ago, the market expected the rate to go down no lower than eight percent, now the market is beginning to wonder whether another cut beyond August might not be necessary -- marking something of a revolution in monetary policy in a country that had 6.5 percent inflation last year.

Fall in industrial output

“There are discussions as to whether the next central bank meeting after August, in October, might lead to a new smaller cut, of a quarter point,” Roberto Troster, former chief economist of the Federation of Brazilian Banks, told AFP.

 Last week, authorities said the country’s already weak industrial output slumped a further 0.9 percent in May from a month earlier, and 4.3 percent compared with May 2011. Consumer prices, meanwhile, rose 0.08 percent in June, according to official statistics.

The central bank has slashed its official GDP forecast for 2012 to 2.5 percent from 3.5 percent, while market analysts are projecting growth of around two percent.

The Brazilian government is hoping that its recent measures to boost industry and consumption will spark a rebound in the second half of this year, but the pace is likely to be slower than initially anticipated. Brazil, the world’s sixth largest economy, grew only 2.7 percent last year, down from a sizzling 7.5 percent in 2010.